I am 30. How should I go about planning for the purchase of a flat worth Rs 1 crore in 1 year?

 

I am planning to purchase a flat in Delhi-NCR. I want to understand how I should go about planning to buy a flat worth Rs 1 crore in one year. How much cash do I need for the down payment, and how much loan should I take from a lender? I currently live in a rented house and pay rent, which is 20 per cent of my income.  

Reply by Mayank Bhatnagar, Chief Operating Officer, FinEdge  

Congratulations on your decision to buy your dream home. Indeed, buying a home is a top aspirational goal for most people from a financial goal-planning perspective.  

Purely from a theoretical standpoint, it makes sense to maximize your down payment on your home loan in order to reduce your EMI burden and save on long-term interest costs. RBI guidelines stipulate that you can borrow up to 75 per cent of the property value, which would work out to Rs 75 lakh in your case. At the present home loan rates, this would work out to an EMI of roughly Rs 65,000 per month for a 20-year home loan. However, this would vary over the lifetime of the loan depending prevailing rates, assuming that you take up a floating rate loan. You have not mentioned how much you pay as rent at the moment, but the saved rent would cover at least part of this EMI once you move into your self-owned home.  

Your total interest burden over 20 years would be around Rs 80 lakh in this case, but if you can increase your down payment to Rs 50 lakh and borrow the rest, this will bring down your interest burden to around Rs 54 lakh—a saving of Rs 26 lakh in pure interest cost! However, the balance between your down payment and your borrowing would depend on your own unique circumstances, including your medium term need for liquidity, your existing investments, the size of your emergency corpus, and even your anticipated cash flows from things like bonuses, vested ESOP’s etc over the next couple of years. A professional investment expert can be very helpful as a sounding board, for enabling you to reach the best decision.  

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Reply by Rajiv Bajaj, Chairman & MD, BajajCapital Ltd.  

To provide you with comprehensive guidance, we must thoroughly assess your financial situation. Your current income is a pivotal factor in making a well-informed decision about property acquisition. In the world of real estate, it’s a common practice for prospective buyers to commit 20 per cent of the property’s total value as a down payment from their personal savings, with the remaining 80 per cent typically secured through a bank loan.  

For instance, if you’re contemplating the purchase of a property with a price tag of Rs 1 crore, you’ll need to be prepared to invest at least Rs 25 lakh from your personal finances. The substantial balance of Rs 75 lakh can then be procured through a loan. However, it’s vital to recognise the financial responsibility that accompanies an Rs 75 lakh loan for the property. This responsibility involves committing to Equated Monthly Instalments (EMIs) to repay the loan.  

In this specific scenario, you’d be facing a monthly EMI commitment of approximately Rs 70,000, in addition to your existing rent payments. This combined monthly financial obligation could amount to nearly Rs 1 Lakh. It’s essential to take a holistic approach to your financial planning, considering not only the EMIs but also the daily household expenses and having a contingency fund in place for unexpected financial emergencies.  

Given these considerations, it is advisable to approach property acquisition with careful consideration. It’s generally recommended not to have EMIs that exceed 50 per cent of your monthly income. To comfortably manage this financial commitment, it’s typically advisable to ensure that your monthly income is in the vicinity of Rs 2 lakh or more. This level of income provides a reasonable financial cushion to accommodate your EMI obligations while also meeting your routine household expenses and handling unforeseen financial requirements with confidence.  

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(Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)